Ordinance On Hedge Associations Statement Of Risks

Original Language Title: Bekendtgørelse om hedgeforeningers opgørelse af risici

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Overview (table of contents) Annex 1



Annex 2



Annex 3 The full text of the Ordinance on hedge associations statement of risks

Under section 34, paragraph 5, no. 2, and section 221, paragraph 3, of law No. 456 of 18. May 2011 about mutual funds, etc., shall be set: scope



§ 1. This Ordinance shall apply to hedge funds approved under section 7, paragraph 1, of the Act on investment associations, etc.

(2). If a hedge Association is divided into departments, the estimation of risks occur for each Department.

Gross exposure



§ 2. The Board must establish a framework for a hedge of association or branch total gross exposure.

(2). The gross exposure for the purposes of the Association or the Department's total net hedge positions as a percentage of total assets.

§ 3. By a net position in a security, money market instrument, instrument or commodity index means the difference between the sum of the long positions and the sum of the market capitalisation of the stock exchange value of short positions in the individual securities, money market instrument, instrument or commodity index, including underlying long and short positions in securities, money market instrument, instrument or commodity index, related to the use of derivative financial instruments.

(2). By a long position means a position that provides a gain at a rate increase or an interest rate decrease for the securities, money market instrument, the commodity instrument or index. By a short position means the numerical value of a position that gives a loss by a rate increase or an interest rate decrease for the securities, money market instrument, the commodity instrument or index.

(3). Statement of positions in derivative financial instruments, which are based on securities, money market instruments, instruments or commodities index, and incorporating an options item, be carried out by multiplying the stock exchange value of the underlying assets with option's delta.

§ 4. By a hedge of association or branch total net positions shall mean the sum of the following: 1) stock exchange value of the hedge of the Association or the Department's total net long positions in securities, money market instruments, instruments or commodities index.

2) cash and cash equivalents, including currency.

3) that the stock exchange value of hedge the Association's or Division's total net short positions in securities, money market instruments, instruments or commodities index.

Distribution and concentration



§ 5. The Board should establish how a hedge organization or Department may allocate its portfolio.

(2). The Board must also determine the appropriate framework for the percentage distribution.

(3). A hedge Association or Department can, for example, allocate its portfolio in the following areas: 1) securities regulation. § 3 (1) (8). 2, of the Act on investment associations, etc.

2) securities markets.

3) Short and long positions.

4) securities issued by the same body.

5) acclaimed ratings on interest-based securities and instruments.

6) Investing in other hedge funds and hedge funds.

7) Listed and non-listed securities.

8) Currency.

Standard deviation



§ 6. The Board must establish a framework for a hedge of association or branch standard deviation of respectively 1, 3 and 5 year term.

Sensitivity analysis



§ 7. The Board must ensure that a hedge or Department shall carry out appropriate sensitivity analysis Association (stress-tests).

(2). In annex 1 listed examples of appropriate sensitivity analyses.

Additional requirements for the statement of risks



§ 8. The Management Board shall, on the basis of a hedge of association or branch risk policy and risk profile to identify relevant potential risks.

(2). The Board of Directors must, as a minimum, identify whether a hedge organization or Department has risks associated with the following: 1) interest rates, foreign exchange, equities, Inc. derivative instruments based on the same, as well as commodity instruments, due to conditions that relate to the market as a whole, or due to circumstances that relate to the individual issuer of securities or securities (position risk).

2) Concentration of the portfolio, for example, within individual types of securities or securities markets (concentration risk).

3) That a counterparty and issuer can go bankrupt, and that a counterparty fails to pay or deliver as agreed (credit and counterparty risk).

4) To a position cannot be traded for a timely and price due to low liquidity on the relevant market (liquidity risk).

5) Administration and management, including IT systems (specific operational risk).

6) investment for borrowed funds and investment in derivative instruments (risk of leverage).

§ 9. The Board of Directors shall lay down appropriate additional objectives and framework for a hedge of association or departmental risks. If the Board chooses to certain risks must be unlimited, the Board of Directors may opt to set goals and framework for doing so.

(2). The Board's identification and definition of objectives and frameworks, including frameworks established pursuant to § 2 and § § 5 – 6, must clearly appear in the Association's or Department's hedge risk framework.

(3). The Board must ensure that hedge the Association's or Department's methods for the estimation of risks are sufficiently described in the business times.

(4). The Board must continuously assess the relevance of the additional objectives and frameworks.

§ 10. The Board of Directors may use the examples mentioned in annex 2 additional risk measures in cases where the Board does not want unlimited outline options, see. § 9 (1), (2). PT.

The use of VaR models



§ 11. A hedge organization or Department, which chose to use VaR models to meet the additional requirements for position risk related to interest rates, equities, foreign exchange and commodity instruments shall meet the requirements set out in annex 3.

Guidelines on risk management and inventories of current risks



§ 12. A hedge organization or Department shall comply with the risk framework, as the Association's Board of Directors has laid down for hedge or Department on the basis of the statutes provisions on investment policy and risk profile, see. § 146, paragraph 2, of the Act on investment associations, etc.

(2). A hedge organization or Department shall, where necessary, assessing current risks in order to ensure compliance with the established framework.

(3). Exceed a hedge Association or Division one or more of the established framework, this must be immediately reported to the Danish financial supervisory authority together with a statement of the background for the overrun and a description of how the hedge will respond to similar excesses in the future, see. § 146, paragraph 3, of the Act on investment associations, etc.

(4). A hedge of association or branch to all registered members must be informed about all exceedances of the risk framework laid down in the statutes or by the Board of Directors, see. § 146, paragraph 5, of the law on investment funds, etc.

(5). A hedge organization or Department must have a safe internal procedures relating to the inventory, management and control of risks.

Publication of intrinsic value as well as statement and disclosure of risks



§ 13. A hedge Association or Department should at least every 14. day publish hedge the Association's or Department's intrinsic value, see. section 87, paragraph 1, of the Act on investment associations, etc.

(2). A hedge organization or Department must always inform about the intrinsic value of the times, where it carries out emission and redemption.

(3). A hedge organization or Department shall in connection with the publication an account of how the internal value is calculated in the case where it is not possible to calculate a single value on the basis of current prices.

§ 14. A hedge of association or branch of the prospectus shall contain information concerning the Department's risk framework, respectively of the Association the hedge without prejudice. 35, paragraph 1, of the Act on investment associations etc. where change in risk framework, they must be registered members must be notified, without prejudice. section 87, paragraph 2, of the Act on investment associations, etc.

(2). A hedge organization or Department shall on the basis of the measurements carried out in accordance with article 12, paragraph 2, make public statements concerning the risks each month.

(3). Statements in accordance with paragraph 2 must be drawn up on a manageable way and contain the current statements in conjunction with the established framework, including relevant description.

(4). Where a hedge organization or Department has significant risks, as the Board of Directors to establish a framework for the opt out, this must be clearly stated in the statement.

(5). Where a hedge Association or Department has a website, the information pursuant to paragraph 2, and section 13 shall be published on the website.

(6). Where a hedge Association or a Department does not have a website, the statements will be published on the other way, however, as a minimum, so that all registered members receive a notice.

Criminal provisions



§ 15. Violation of the provisions of article 2, paragraph 1, article 5, paragraphs 1-2, section 6, paragraph 1, article 7, paragraph 1, § § 8-9, section 11, section 12, paragraphs 2 and 5, section 13, paragraph 2-3 and section 14, paragraphs 2 to 6 are punishable by a fine.

Entry into force of the



§ 16. The notice shall enter into force on the 1. July 2011.

(2). At the same time repealed Executive Order No. 1468 of 20. December 2005 on hedge associations statement of risks.

The Danish financial supervisory authority, the 29. June 2011 Ulrik Nødgaard/Anne Marie Pico



Annex 1 examples of appropriate sensitivity analyses


1) Provided a hedge or Department uses leverage, that Association as an essential part of the investment strategy should help to achieve a higher return, hedge or Department calculate the scenarios for the potential total return at a maximum and minimal use of the framework for the total gross exposure, see. section 2, paragraph 1, where the value of the total investment falls with, for example, 20 per cent, 30 per cent and 50 per cent.

2) Provided a hedge organization or Department as an essential part of the investment strategy wants to have an overall short net position, hedge or Department calculate the scenarios for the potential total return, where the value of the Corporation's or the Department's total net hedge positions rising by, for example, 20 per cent, 30 per cent and 50 per cent.

3) Provided a hedge organization or Department uses an investment strategy with significant concentrations of investment types, hedge or Department calculate the scenarios for the potential total return, where the value of the concentrated investment falling by, for example, 20 per cent, 30 per cent and 50 per cent.

4) Provided a hedge organization or Department using a ' long/short strategy, where korrelationerne between ' uniform investment is an essential factor, to hedge or return the Department calculate scenarios for the potential total return, where korrelationerne between long/short investment develops significantly different than expected.



Annex 2 examples of additional hazard targets

1) Provided a hedge organization or Department have significant interest rate risk, for example if the hedge or Department has a strategy about speculation in the market rates, the Board of Directors in accordance with section 9, paragraph 1, lay down the objectives and framework for the overall interest rate risk associated with positions in the Association's or Department's hedge portfolio, including interest rate risk on the payments related to the use of derivative financial instruments.

If the statement is based on the principles set out in the FSA announcement on capital-coverage, the total interest rate risk is calculated on the basis of the sum of the changes in the exchange rate values for the hedge of the Association or the Department's positions in bonds and money market instruments, including the change in the present value of the payments related to the use of derivative financial instruments by an interest rate increase of one percentage point. In addition, the interest rate risk is calculated for each currency separately. In determining the overall interest rate risk are summarized the numerical value of the interest rate risk of the individual currencies. The statement may be based on targets for the duration and modified duration calculated on the basis of the rules laid down in point 3 of annex 2 to the FSA announcement on capital adequacy.

2) Provided a hedge Association or Department has significant interest rate risk, for example, stretching if hedge or Department has a ' fixed income arbitrage ' strategy, which sought to exploit disparities in price formation on interest-bearing securities by speculating in the evolution of interest rate spreads between the bonds, the Board of Directors in accordance with section 9, paragraph 1, lay down the objectives and framework for the overall interest rate risk associated with the stretching positions in the Association's or Department's hedge portfolios , including the risk of payments related to the use of derivative financial instruments.

Statement, for example, can be carried out on the basis of the sum of the changes in the exchange rate values for the hedge of the Association or the Department's positions in bonds and money market instruments, including the change in the present value of the payments related to the use of derivative financial instruments by, respectively, a narrowing and widening of the yield spread between the bought and sold bonds, measured by the difference between the effective interest rate, for example, 10 basis points.

3) Provided a hedge organization or Department have significant correlation risk, for example if the hedge or Department has a ' market neutral ' strategy, focusing on a low correlation in relation to the market, the Board of Directors in accordance with section 9, paragraph 1, lay down the objectives and framework for the total correlation risk, Inc. correlation risk related to the use of derivative instruments.

Correlation risk, for example, can be measured by calculating the correlation between the portfolio's total return and the return of a relevant benchmark.

4) Provided a hedge Association or Department has significant currency risk, the Board of Directors in accordance with section 9, paragraph 1, lay down the objectives and framework for doing so.

Currency risk can be measured, for example, through currency indicator 1, which specifies the largest sum of hedge Association's short and long currency positions, calculated in accordance with annex 6 to the FSA announcement on capital adequacy.

5) Provided a hedge organization or Department has substantial equity risk, for example if the hedge or Department has an ' equity long/short ' strategy, and thus substantially investing in shares, the Board of Directors in accordance with section 9, paragraph 1, lay down the objectives and framework for the general stock risk, Inc. share the risk associated with the use of derivative instruments.

Share the risk, for example, can be determined by use of beta. Beta is calculated as the covariance between the portfolio yield and a relevant market yield divided by the variance of the market yields.

6) Provided a hedge Association or Department has significant option risk, for example if the hedge or Department has an ' equity long/short ' strategy, where the long and short positions in the significantly consists of options, the Board of Directors in accordance with section 9, paragraph 1, lay down the objectives and framework for doing so.

Options, for example, can be measured via delta risk and vega.

7) Provided a hedge organization or Department has significant counterparty risk, for example if the hedge or Department largely deals with securities traded OTC, the Board of Directors in accordance with section 9, paragraph 1, lay down the objectives and framework for counterparty risk.

Counterparty risk can, for example, is calculated as the value attached to the use of securities, including derivatives traded OTC. This value must then be decomposed as the positive market value of the instrument with the addition of the potential future receivables. The supplement is calculated in accordance with Annex 1 to the Decree on investment associations, specialised associations, fåmandsforeningers and innovation associations use of derivative financial instruments.

Have a hedge organization or Department entered into a nettingaftale, which satisfies the conditions laid down for contractual netting agreements pursuant to § § 58 h and 58i, of the law on securities trading, the value of securities with market value of negative offset value of securities with positive market value with the same counterparty in determining counterparty risk in accordance with section immediately-bart above.

After the inventory of counterparty risk, as described above, may be made deduction of received collateral in the form of securities and money market instruments may be included in the Association's or Department's hedge assets.



Annex 3 Requirements for the use of VaR models

The requirements for a hedge of association the use of VaR models, including one or more departments ' use of VaR models, is based on similar rules for, among other things. banks ' use of internal models for the estimation of records with position risks for capital adequacy purposes. The FSA has a guide for financial institutions, etc. lays down general requirements for internal models to be used for the compilation of records with position risk.

Var models may only be made if the hedge meets the following requirements.

I) qualitative requirements

Hedge the Association's model/models can only be used for the calculation of position risks, if hedge Association's risk management and controls are adequate and implemented with integrity show. This implies, inter alia, to the following qualitative requirements must be met:

a) Model/models must be closely integrated in the hedge the Association's day-to-day risk management and to serve as a basis for reporting of risks to hedge the Association's Board of Directors and executive management or investment management company.

b) Hedge has a risk control function, which reports directly to the Executive Board of the Association or investment management company hedge. Risk control with the task of formulating, updating and implementing hedge Association's risk management systems, including the VaR models. The function is required to prepare and analyze reporting concerning the model/models ' results, including elaborate reporting on compliance with the limits laid down in the instructions, etc.

c) Hedge the Association's Board and management or investment management company must be active in the risk-control process and the daily reports must be treated kontrolfunktionens risk at a level of management with sufficient authority to be able to reduce the Corporation's or the Department's positions and hedge risks.

d) Hedge the Association must have a sufficient number of qualified employees.

e) Hedge should establish control procedures to ensure that hedge the Association's written instructions and procedures relating to the use of the model/models are complied with and monitored.

f) Hedge must have sufficient evidence that the model/models have historically meant hedge the Association's or Department's risks with reasonable accuracy.


g) Hedge must carry out stress-tests and the results thereof must be reviewed by, among others, the Executive Board or investment management company. The results of stress tests carried out must be reflected in the instructions and the limits to be fixed by the Board of Directors and the Executive management or investment management company.

h) Revision to carry out independent reviews of the model/models and their application.

in) Hedge the Association shall at least once a year to carry out a study of the model/models and risk management as a whole, which, as a minimum, involves an examination of the

1) whether or not documentation of the model/models, risk management and risk kontrolfunktionens organisation and tasks are complete,

2) the integration of market risks calculated by the model/models are integrated into the daily risk management and the integrity of the management reporting is adequate,

3) hedge Association's procedures for the approval of risk calculation and valuation methods

4) the market risks covered by risk calculation methods, and assessment of any significant changes in risk calculation methods,

5) whether or not the statement of the Association's or Department's hedge positions are correct and complete, whether calculated volatilities and correlations are accurate, and whether the statement and calculation of risk sensitivities are accurate,

6) the verification process the hedge uses in assessing whether the sources of information used in the model/models, are consistent, current, and reliable, and whether such sources are independent, and

7 procedures for the development of the Association's hedge) back-tests, conducted with the aim of assessing the model/models ' accuracy.

II) quantitative requirements

Hedge the Association's model/models must, as a minimum, apply the following quantitative criteria in the calculation of position risks:

(a)) calculation of hedge Association's or Department's potential risk on at least a daily basis.

(b) 99% confidence interval Unilaterally).

c) Bearer period equal to 10 days.

d) effective historical observation period of at least one year except where a shorter observation period is justified by a significant change of price volatility.

e) at least quarterly updating of volatilities, correlations, etc.

III) calculation of general risk

If the hedge using VaR models, represents the overall risk the largest amount of the following values:

a) General risk calculated for yesterday's positions.

(b)) the average of general risk calculated the last 60 working days.

IV) Risk Factors

Model/models must take account of a sufficient number of risk factors, depending on the Association's or Department's activity level of hedge in the respective markets, including material risks relating to options and option-like positions. At a minimum, the following provisions are complied with:

(a)) For interest rate risk, the model using a set of risk factors corresponding to the interest rates in each currency in which the hedge or Department have interest-sensitive positions. Hedge must estimate the yield curves using generally accepted practices. For significant interest rate risk in the major currencies and markets, the yield curve shall be divided into a minimum of six maturity segments, to capture differences in volatility along the yield curve. The model must also capture the risk of correlation between different yield curves are not complete.

(b)) For Exchange rate risk, the model using risk factors corresponding to the individual foreign currencies, hedge or have positions in the Department.

(c)) For stock quote risks must use at least a separate risk factor model for each of the equity markets, where hedge or Department has positions. Hedge can use empirical correlations within risk categories and across risk categories if hedge Association's model/models for the evaluation of correlations is conceptually sound and implemented with integrity.

V) calculation of specific risk

Hedge can use VaR models for calculating the specific risk of shares and debt instruments. The models must in addition to the requirements set out in paragraph (IV) comply with the following:

(a)) Explain historical price variation in the portfolio volatility.

b) take account of the concentration in terms of magnitude and changes of composition of the portfolio.

(c)) Be robust to changes in assumptions.

d) is validated through back-testing aimed at assessing whether that accurately takes into account the specific risk. If implemented back-tests on the basis of relevant sub-portfolios, these must be chosen consistently.

If a hedge Association uses the VaR models in accordance with points (a))-d) for the purpose of calculating the specific risk, specific risk is calculated for each risk category, IE. shares and debt instruments or for the portfolios of these, which involve a specific risk.

Are accounted for under the specific-risk portfolios in hedge or the Department, under the portfolios established on consistently show.

Hedge may waive the separate calculation of specific risk, as stated above, if the hedge the Association's model/models for the calculation of general risk is in line with the agreed international standards and accurately take account of the risk of unforeseen events and delinquency (' event and default risk '), when it comes to its shares and debt instruments.

Vi) Back-tests

Hedge must verify the accuracy and the results of the model by implementing back-tests. Back-tests carried out by the daily potential risk for loss, calculated using hedge Association's model for the hedge of the Association or the Department's portfolio daily end positions, compared with the daily change in the portfolio's value by the end of the following business day. Hedge must be able to perform back-testing on the basis of both actual and hypothetical changes in the portfolio's value.

Back-testing on the basis of hypothetical changes in the portfolio's value is performed by comparing the portfolio's daily closing value and, assuming unchanged positions, its value at the end of the following day, IE. Apart from acting, which concluded the following day. Back-testing on the basis of actual changes in the portfolio's value is performed by comparing the portfolio's daily closing value with the final value of the hedge of the Association or the Department's portfolio the following day, IE. to account for any deals that concluded the following day. An excess is a daily change in value of the portfolio in excess of the related daily potential risk is calculated using hedge Association's model/models.

If the hedge the Association's model/models have many exceedences, indicating that it is not sufficiently accurate, the Danish financial supervisory authority authorisation or imposing hedge to take necessary measures to ensure that the model/models should be improved. Hedge must take appropriate measures in order to improve its back-tests, if these are deemed to be inadequate.